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Retail Industry – The Budget: Before and After – AT Kearney India

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Retail Industry – The Budget: Before and After
Raman Mangalorkar, Principal,
AT Kearney India

1. The Indian retail market

The Indian retail paradigm is shifting with the emergence of new formats in the form of hypermarkets, supermarkets, and specialty and convenience stores. A host of foreign retailers are looking to enter the Indian retail market, where Indian business houses such as Reliance Industries, Aditya Birla Group and Tata are also rapidly building their presence.
The organized retail market in India is growing at a CAGR of 27 per cent, with revenues expected to exceed USD 100 billion in 2015. The retail revolution is making itself felt across the board with the urban Indian consumer looking for a superior retail experience, and diverse income groups providing an eager customer base across formats.

2. Pre-budget expectations and outcomes

The retail sector and consumer industry did not expect any significant changes in Budget 2007. Major requirements of these sectors pertain to FDI regulations, taxation, real estate, supply chain network, and industry status.

2.1 FDI regulations for retail

Indian regulations do not allow for foreign-owned and controlled retail chains. Currently, foreign retailers operating department stores or multiple brands can only operate in India through a local franchise partner or as wholesalers.
The government needs to ease restrictions and draw a roadmap for opening the sector to FDI. It has already stated its intention to permit foreign investment in “single-brand” retail up to 51 per cent in a few segments like electronics, sports goods, building equipment, stationery and furniture. However, liberalization of this sector will be delayed due to the greater inclination of the central government towards the Left.

2.2 Roadmap for a countrywide goods and services tax

The multiple taxation system across states makes it difficult to establish a seamless supply chain network in India, keeping it underdeveloped till date.
Development of supply chain infrastructure and one national tax for goods and services are imperative for speeding up development, but the central sales tax (CST) is expected to be addressed only in the 2010-11 budget.
The CST rate has been reduced from 4 per cent to 3 per cent in the latest budget, and this will help reduce the cost of transferring goods across states for consumer industries and the retail sector.

2.3 FMCG sector and cold chain

The food retailing arena has seen significant activity with players like Foodworld, Reliance and Subhiksha establishing stores all over India. General merchandise and lifestyle products are also emerging as growth segments.
The agriculture focus in Budget 2007 will benefit rural income and FMCG companies. Tax abatement and thrust on the cold chain in the FMCG sector in this budget are expected to improve food processing volumes and storage. There has been a reduction in peak import duty by 2.5 per cent (from 12.5 per cent to 10 per cent) in Budget 2007, which will help in import of specific capital equipment for establishment of the cold chain in India.

2.4 Real estate regulations

For construction-development projects, a minimum built-up area of 50,000 square metres is mandated. Escalating real estate costs further hinder the feasibility of organized retail.
The finance minister has instituted a service tax levy of 12.24 per cent on all commercial renting of immovable property in Budget 2007. This does not augur well for the retail sector, where real estate availability was already a major hindrance.

2.5 Industry status for the organized retail sector

The retail sector has not been granted industry status as yet. The advantages of granting industry status to the retail sector would be greater focus on retail development, fiscal incentives for the retail industry, availability of organized financing, and single-window clearance for retail-related issues. This issue has not been addressed in the 2007 budget.

In summary, the finance minister has lived up to the consumer industry and retail sector expectations of the 2007 budget being a non-starter.

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